The Effect Of Abnormal Pay Dispersion On Earnings Management

Abstract

This study examines the effect of the abnormal pay dispersion on earnings management. Prior studies find that pay dispersion among top executives affect firm performance and executive turnover. We expect that abnormal pay dispersion among top executives affects financial reporting practice as well as firm performance and turnover and provide evidence of positive association between abnormal pay dispersion and earnings management. This result suggests that executives are more likely to be engaged in earnings management to increase their compensation when they feel unfairness from the relative level of compensation. This finding helps financial statement users interpret firm performance and anticipate future outcomes by implying that additional managerial incentives for financial reporting are derived from internal pay dispersion. Our finding that abnormal pay dispersion leads to higher agency costs should also be of interest to shareholders.

Executive compensation, share ownership, and earnings management of banks in Nigeria

“…Fakhfakh (2010) used a sample of 253 firms of "Fortune 1000" between 1994-2005, and the findings revealed that earning management is more prominent in organizations where the Chief Executive Officer's compensation is most closely tied to the value of equity. Also, Byun et al (2016) findings revealed that executives are likely to engage in earnings manipulation to increase their compensation especially when they observe inequity from relative compensation level. Laux and Laux (2009) examine the effect of board committees and CEO compensation on earnings management.…”

“…Executive stock options (executive share ownership) have been held responsible for inspiring some of the biggest corporate frauds in recent years. Some researchers posited that equity-based executive compensa-tions inspire the greater existence of maneuvers (Byun et al, 2016;Lee & Hwang, 2019;Park, 2019). However, some recent researchers believe that a well-compensated executive, whose pay is not tied to performance, rarely engages in earnings management (e.g., Ben Hassen, 2014;Fakhfakh, 2010).…”